GST tax reform prospects boosts markets

The prospect of passage of a goods and services and tax in India has sparked a rally across markets, but analysts say the landmark reform may not provide a sustained boost as recent gains have largely priced in the outcome.

The prospect of passage of a goods and services and tax in India has sparked a rally across markets, but analysts say the landmark reform may not provide a sustained boost as recent gains have largely priced in the outcome.

The government is expected to bring up the tax bill this week in Parliament. If passed, the reforms would replace a slew of federal taxes and levies in 29 states, transforming the nation of near 1.3 billion people into a customs union.

Analysts say the move could boost India’s economic growth by up to 2 percentage points.

But Indian markets have already posted strong gains. The broader NSE share index rose 0.6 percent on Monday to its highest since April 2015.

It has now surged around 28 percent since hitting a near two-year low on Feb. 29, helped as well by hopes about recovering earnings.

Meanwhile, the yield for the benchmark 10-year benchmark bond fell 3 basis points (bps) on Monday to its lowest level since September 2009. It has dropped about 34 bps since Britain’s vote to leave the European Union in late June.

Further gains may be difficult, analysts warn, especially as global investors who have underpinned much of the rally could grow cautious over potential U.S. rate hikes and negative surprises from China.

India is also facing a critical month in August as the government gears up to appoint a new central bank governor to replace Raghuram Rajan, who will step down in early September.

“For India, I think it will continue to hold its position as a relatively positive play for investors, even if it is unable to hold to current scale of gains,” said Radhika Rao, an economist with DBS Bank in Singapore.

Gains in India could also be tempered since other Asian high-yielding markets are seen attracting foreign investors.

Overseas funds have bought a net $2.7 billion of debt and equity from Indian financial markets in July, but that is still below other countries in Asia such as Indonesia and South Korea.

“Other markets like Indonesia and Philippines look more attractive. In India, liquidity is going to drive rates lower,” said a senior treasury official with a foreign bank said.